Weekly fixed income review

Week to 28 August 2020

  • The US Federal Reserve (Fed) intimated  it was willing to tolerate higher inflation going forward. In a shift in approach, Fed governor Jerome Powell stated, at the annual policy meeting for major central banks, that the Fed would be comfortable with an inflation rate of over 2% for relatively extended, albeit unquantified, periods. This implies interest rates staying lower for longer, as the Fed attempts to put the US economy back on an even keel. Yields on government bonds rose sharply and the yield curve steepened following the comments.
  • Investors took profits in US Treasury bond positions, as ‘risk-on’ sentiment dominated markets over the week, with global equity markets breaking into new all-time high territory. The announcement that the US and China would honour the ‘phase one’ trade agreement, signed in January, encouraged investors, as did some signs of a peaking in new coronavirus cases in the US and hopes for a COVID-19 vaccine. The 10-year Treasury yield rose close to 0.8% at the end of the week, its highest level since early June
  • German Bunds sold off as risk appetite among investors recovered. The recent marked rally in German Bunds ended and yields rose, as investors were cheered by seemingly improving trade relations between the US and China despite the recent tensions over various matters between the two sides. Rising optimism around a vaccine and the release of the German IFO Institute’s Business Climate Index, which showed further improvement in August, also boosted sentiment.  Yields rose from -0.5% to -0.38%.
  • A long-dated Japanese government bond auction was met with strong demand.  The auction of 20-year government bonds was well covered, at 3.92 times, compared to 3.8 at the last comparable auction. The yields on 20-year JGBs fell below 0.4% at the time of the auction before recovering later in the week; those on 10-year bonds also rose from mid-week, reflecting the global risk-on climate.
  • The Central Bank of India warned banks that there was an urgent and growing need for recapitalisation. The central bank governor Shaktikanta Das stated that, faced with the economic fallout from the COVID-19 pandemic, there was a need for fund raising, especially from state banks and smaller private banks. While some larger banks such as ICICI had already been active in raising capital, other banks should follow suit, according to Governor Das, given the likely rise in bad debt formation over the coming months.
  • In US credit, corporate spreads were unchanged at 130bp as markets entered their late August lull. Markets did react very positively on Thursday to Jerome Powell’s announcement on average inflation targeting. New issuance slowed after hitting an August record of $140bn, with Royalty Pharma, Nordea, and Athene issuing. In euro credit, supply picked up this week, with a total of four hybrid deals (Vodafone, Solvay, OMV and Total).

Chart of the Week: Selected 10-year government bond yields

Chart of the Week: Selected 10-year government bond yields

Source: Bloomberg. Data as at 28 August 2020.

Bond spreads (over govts)Week-to-date change (bp)
Bloomberg Barclays US Corporate Index 130bp -1
Bloomberg Barclays Euro Corporate Index 115bp -1
Bloomberg Barclays Sterling Non Gilts Index 124bp -1
Bloomberg Barclays US Corporate High Yield Index 477bp -24
Bloomberg Barclays Pan-European High Yield Index 436bp -14
Bond yields (10yr)
USA 0.75% +12
Germany -0.41% +10
Japan 0.04% +1
UK 0.34% +13
EquitiesWeek-to-date change
S&P 500 3,485 +2.6%
DJ Euro Stoxx 50 3,331 +2.2%
FTSE 100 6,000 0.0%
DAX 13,096 +2.6%
Nikkei 225 23,209 +1.3%
Currencies
EUR/USD 1.18 +0.2%
JPY/USD 106.57 -0.7%
GBP/USD 1.32 +0.8%
Commodities
Brent Crude ($ per barrel) 45.09 +1.7%
WTI Crude ($ per barrel) 43.04 +1.7%
Gold ($ per ounce) 1,929.54 -0.6%

Source: Bloomberg, 28 August 2020. Prices close of business August 27, 2020.

Economic calendar

31 August: Eurozone second-quarter GDP
1 September: US, UK and eurozone manufacturing PMIs
2 September: US factory orders, eurozone unemployment
3 September: US, UK and eurozone services PMIs
4 September: US non-farm payrolls, US unemployment

Important information

The value of investments and any income from them will fluctuate and is not guaranteed (this may be partly due to exchange rate fluctuations). Investors may not get back the full amount invested. Past performance is not a guide to future performance.

Investments in bonds are affected by interest rates and inflation trends which may affect the value of the portfolio.

Where the portfolio holds over 35% of its net asset value in securities of one governmental issuer, the value of the portfolio may be profoundly affected if one or more of these issuers fails to meet its obligations or suffers a ratings downgrade. 

A credit default swap (CDS) provides a measure of protection against defaults of debt issuers but there is no assurance their use will be effective or will have the desired result.

The issuer of a debt security may not pay income or repay capital to the bondholder when due.

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Where high yield instruments are held, their low credit rating indicates a greater risk of default, which would affect the value of the portfolio.

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